Wednesday, 14 November 2007

How much would I need to retire tomorrow?

I currently earn around $84K + 9% superannuation, but could "make do" with much less, which is why I can afford to think about changing careers to become a high school science teacher (with a starting salary around $50K) in a couple of years time (assuming I finish my GradDipEd course!). But what if I decided to retire tomorrow (or had to, due to a disability)? What lump sum would I need to be able to provide this level of income until I reach 60? A common "rule of thumb" is to allow a draw down of 4% pa from a lump sum, but this assumes you want the funds to last indefinitely. Assuming a total return of around 10%, 3% inflation and to provide an annual income of $50K (adjusted for inflation) for 14 years it turns out that a lump sum of around $450K would be sufficient. This is about what I expected -for example my life insurance and TPD insurance is for $400K. In fact my investments outside of my home and retirement account are more than this, so I could retire tomorrow if I suddenly had the urge, but this would mean a fairly frugal retirement, with no spare for "luxuries" or unexpected medical needs, and there wouldn't be much of an inheritance for the kids. But it does give me some peace of mind knowing that if I suddenly lost my job or quit I could afford to take my time looking for a new position.

Copyright Enough Wealth 2007

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